Sweeper clauses and costs recovery

2) Whether or not a leaseholder-owned company should be treated differently

The case concerned a block each with 999 year leases. The landlord was the residents management company (RMC).

In 2010 the leaseholder to flat 29 had brought a claim against the RMC after it had failed to take action to repair her damaged floor. The end result was that the RMC admitted it had breached its repair covenant - but only after incurring legal costs of around £15,000, including £2,500 of damages.

These costs were then put through the service charge and split across the remaining 38 leaseholders. One of them, Mrs Fairbairn, refused to pay.

The RMC took the case to the First-tier Tribunal (FTT) on the basis that they could recover the costs through the lease’s ‘sweeper clause’, which said costs could be recovered for the purposes of carrying out ‘…all other acts and things for the proper management administration and maintenance of the blocks of flats as the Lessor in its sole discretion thinks fit.’

The FTT found in favour of the RMC. An Appeal was made to the Upper Tribunal (UT). The UT found that the ‘sweeper clause’ can be used cover unspecified costs incurred in the proper management of the block – including legal costs. What it was not there for, however, was to cover legal costs incurred by the landlord in defending a breach of their covenant.

So, legal costs can be recovered through a sweeper clause... but not if these costs arise because the landlord had breached the terms of the lease.

Our advice? The tribunal clearly recognises there is a place for sweeper clauses but RMCs and managing agents need to be careful how they use them. If you find yourself in breach of the terms of the lease, e.g.through failing to meet a repair covenant – you could be unlikely to be able to recover the costs of defending this breach through the service charge.

Timely collection of service charge monies is essential for RMCs and other leaseholder-owned companies with no other source of income.

In Fairbairn, the RMC appealed to the UT to consider their status as a leaseholder-owned company and recognise its lack of assets.It was stated the status of the landlord should not affect how the costs recovery clause was interpreted. RMC directors must enter into their role with their eyes open, and consider what sources of funding they can rely on should an expenditure item not be able to be put through the service charge.

Harpreet Lehal is a Solicitor at Brady Solicitors